1. Field
This relates to the field of making payments via the Internet.
2. Prior Art
Commerce on the Internet includes the sale of physical and digital products and services. The total amount to be paid for a single commerce operation is composed of many smaller costs, such as the cost of shipping, the cost of a payment transaction, plus other costs. The term “payment transaction” includes the act of paying, when money is transferred from a user to one or more vendors, usually with the help of one or more brokers such as banks, a credit card company, or an online payment company. This money transfer usually costs something for the broker to perform, which is called the cost of the payment transaction.
When selling physical products, such as books or CDs, it is necessary for the vendor to ship them to the buyer. The cost of shipping usually sets a minimum cost for the whole commerce operation, so that the total amount that the buyer must pay will never get very small. As a result, the cost of the payment transaction itself becomes negligible in comparison, and is not a critical factor.
However, the selling of digital products or services, such as digital music or videos, can, in most cases, be completely fulfilled through the Internet, without any shipping costs. In this case, the total amount that the buyer must pay may indeed be very small, and the cost of the payment transaction is not negligible. As an example, it may be acceptable for a vendor to spend 20 cents to complete a 15-dollar sale, but it is unacceptable to spend 20 cents to complete a 25-cent sale. It becomes apparent that transaction costs must be kept very small.
Some payment systems, called “intermediary payment systems”, work by letting a user pay vendors by using another payment system, called the “primary payment system”. For example, PayPal (a company from San Jose, Calif.) allows users to pay with credit or debit cards for purchased goods or services. In this case, PayPal is the intermediary payment system, while the credit or debit card company (e.g., VISA or MasterCard) is the primary payment system. Therefore, PayPal is acting as an intermediary between users and vendors and the credit or debit card company. However, a company that serves as an intermediary in some cases can also become the primary payment system in other situations. For example, suppose a hypothetical company XYZ allows users to pay with PayPal for purchased goods or services. In this case, XYZ is the intermediary payment system, while PayPal becomes the primary payment system.
It is common that the primary payment system charges both a fixed fee and a variable fee to perform payments. For example, a primary payment system may charge a fee of 5 cents plus 5%. Then, for example, if a payment transfers 20 cents this would result in a fee of 6 cents, or 30% of the total. The intermediary payment system usually also charges a fee. If, for example, the intermediary payment system charges a 10% fee for acting as an intermediary for a 20 cent payment using the fee structure described above, it would be good if the user could be charged 5 cents plus 15% (5 cents plus 5% for the primary payment system and 10% for the intermediary payment system). This usually doesn't happen in practice because paying the intermediary payment system constitutes a separate payment that incurs separate fixed fees (i.e., the fixed fee will be charged twice). The total fee charged by the primary payment system for both payments would therefore be 11 cents, i.e., 55% of the original 20 cents, possibly rendering the payment impractical in economic terms.
Things further complicate when there is more than one vendor. For example, if a video website hosts a video created by a content producer, then both the website and the content producer may be considered vendors, and would probably split the payment. For example, the intermediary payment system could get 10%, the video website could get 20% and the content producer could get 70%. In this case, the total fee charged by the primary payment system for the three payment parts (or the three separate payments that compose a larger payment batch) would be 16 cents, i.e., 80% of the original 20 cents. If even more vendors are added, the total fee would surpass the total payment value.
A diagram for regular intermediated payments can be seen in simplified form in FIG. 1. Users 100 perform payments to one or more vendors 101, intermediated by an intermediary payment system 102. A primary payment system 103 transfers values from users to vendors 104 and from users to the intermediary payment system 105. It is also possible the variation (not shown) where the primary payment system transfers values from vendors to the intermediary payment system, or other arrangements like this. Note that, in this figure, the arrows from users to receivers (i.e., to the vendors and the intermediary payment system) do not represent different payments transactions, but a single payment transaction where many receivers each receive a part of the paid amount. Of course, it is possible to look at this individual payment parts as separate complete payments; and indeed this is usually the way the primary payment system sees them. The many users in the figure could also represent the same user doing different payments.
To minimize transaction costs, many intermediary payment systems resort to a technique called payment aggregation (also less frequently called payment bundling), which means the intermediary payment system receives and holds the total payment amount on behalf of the vendors, and pays them only when the aggregated values reach a certain minimum amount or other condition. For example, if 100 users pay 20 cents each to a video website and to a content producer, the intermediary payment system could get all the money and pay the primary payment system's fees which, in this case, would be: 100×5 cents+1 dollar=6 dollars. Then, the intermediary payment system could pay the video website and the content producer with only two more payments that would cost 10 cents+0.7 dollar=1.07 dollars. The total paid fee is then 7.07 dollars. This is 35.4% of the total, instead of the 55% of the total when paid without aggregation.
The term “aggregation” can also mean that users pay a relatively large upfront amount (prepaid), or a later aggregated amount (post-paid) to the intermediary payment system. Amazon Payments permits direct prepaid and post-paid payment aggregation, but not intermediated payment aggregation (See Amazon FPS Aggregated Payments Quick Start, at https://payments.amazon.com/sdui/sdui/business?sn=devfps/aggregated). In other words, a main objective of Amazon Payments aggregation is to permit aggregation of payments for a single vendor, i.e., directly from the user to a vendor, and not from the user to an intermediary payment system and from there to many vendors. For this reason this kind of payment aggregation is less problematic, but does not address the problem of distributing many small payments to different vendors.
In short, what characterizes intermediated payment aggregation (hereafter “payment aggregation”, “payment with aggregation”, or simply “aggregation”) is the fact that the intermediary payment system (or some entity in the intermediary payment system's behalf) receives, at some point, third-party amounts that are ultimately directed to other third-parties. This is especially so if there is no one-to-one correspondence between exact parts of amount transferred to and from the intermediary payment system.
A diagram illustrating payment aggregation can be seen in simplified form in FIG. 2. Users 200 perform payments ultimately directed to vendors 201, with the participation of an intermediary payment system 202. A primary payment system 203 transfers values from users to the intermediary payment system 204 and then from the intermediary payment system to the vendors 205. Of course, the many users in the figure could also represent the same user doing different payments.
U.S. Pat. No. 5,978,780 (Watson, “Integrated bill consolidation, payment aggregation, and settlement system”, Nov. 2, 1999), for example, discusses “aggregating all of the obligation values that have been applied to purchaser's accounts that are destined for the same establishments”. This patent and others disclose how to perform payment aggregation. But while aggregation seems to be a viable solution for the problem from an economical point of view, it is, unfortunately, against the rules of many primary payment systems, or requiring special government permits, or even illegal in some jurisdictions.
For example, aggregation is forbidden by VISA and MasterCard and also by most other credit card operators. The reason why they usually forbid aggregation is that the process actually hides the receiver from the primary payment system. When intermediary payment systems become authorized merchants for VISA and then let other merchants accept credit cards through their accounts, the merchants end up not having direct relationships with VISA, thus preventing risk management and other controls. The reason why merchants may prefer dealing with intermediary payment systems instead of VISA is that usually the intermediary makes the process easier and faster by not demanding all the documents that VISA would demand. Another reason is that some merchants want to trade goods or services forbidden by VISA rules, and may not be able to obtain a VISA merchant account anyway.
Note these are not the same reasons why aggregation is used for small payments, which is the reduction of fees, but both types of aggregation end up, perhaps unfairly, prohibited by credit card operator rules.
Another problem with aggregation is that it may also, in some cases, require special government permits because the intermediary payment system may hold third-party funds for some period of time. While these permits can usually be obtained, they may prove expensive and not viable for small companies. In some countries, intermediary payment systems may even be obliged to register as banks.
Another problem is that aggregation may create liability issues for the intermediary payment system. Suppose the intermediary payment system receives money from a user and subsequently pays a vendor. If there is a chargeback, i.e., if the user demands the money back because of fraud or other reasons, then the primary payment system will withdraw the money from the intermediary payment system, since the intermediary is the receiver from the primary payment system's perspective. The intermediary payment system will lose money unless it is able to also withdraw the money from the vendor. But this is not always possible without the vendor's permission, especially if the intermediary uses the primary payment system to pay the vendor. In other words, when aggregating, chargebacks get much more complicated for the intermediary payment system, since it cannot rely on the primary payment system to process them.
These payment aggregation problems affect many online payment systems, but especially micropayment systems (usually below 2 dollars) and small value payment systems (usually below 10 dollars) where fixed fees are proportionately more important and can strongly impact overall profitability. In spite of those problems, Watson and other patents and scientific articles that improve upon Watson teach how to improve aggregation, but not how to avoid aggregation.